The Internal Revenue Code requires employers to withhold federal income tax and Social Security & Medicare tax from employee’s wages. These payroll taxes are considered “trust fund taxes” because the employer holds this money in trust, for the exclusive use of the United States government. Cash-strapped businesses sometimes use trust fund taxes to pay creditors to keep their business operating, instead of remitting to the government. These businesses often go out of business; then the IRS must give the employee credit for the withheld amount without yet receiving the trust fund taxes.
The IRS considers this a very serious problem. Congress enacted a law (Internal Revenue Code 6672) to encourage businesses to pay payroll tax on time – AND/OR make sure of ultimate collection, even if from an individual connected to the business. The IRS will impose a penalty known as the trust fund recovery penalty (“TFRP”), usually equal to the amount of money withheld from employee wages but not sent to the IRS. The penalty is imposed on any person who is 1) responsible for collecting, accounting for and paying, AND 2) was willful in failing to remit payroll tax.
Responsible Person
The IRS considers a “responsible person” as one who has a duty to perform, or the power to direct, collection, accounting for or paying, trust fund taxes. There can be more than one responsible person, including:
- An officer or employee of a corporation
– The corporate structure does not protect individuals from personal liability when it comes to TFRP.
- A member or employee of a partnership
- A corporate director or shareholder
- A related controlling corporation
- A lender or any other person with sufficient control over disbursement of funds
Willfulness
The IRS describes “willful” as a responsible person who makes an intentional, deliberate, voluntary and knowing failure to remit payroll tax. The failure is not an accident, nor does it require an evil desire to defraud the U.S. government. It’s the result of a responsible person making the free choice to disregard paying taxes on the behalf of employees. Once the IRS identifies someone as a responsible person, it is difficult for that individual to assert they weren’t aware the business was paying other creditors instead of the IRS.
TFRP Process
An IRS revenue officer will request company documents such as bank signature cards and records showing payment to other creditors in preference to the government. The officer generally will interview identified individuals, and record results on Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes. The form asks very detailed questions about the individual’s – and other people’s – financial responsibilities in the business. The Form 4180 questions are extremely probing and can be used as evidence; many are structured to inform the IRS about company superiors and co-workers. The IRS revenue officer analyzes results of their investigation, and makes recommendations of which individuals were both responsible and willful, i.e. who is subject to TFRP.
The collection process begins with Letter 1153 and Form 2751, Proposed Assessment of Fund Recovery Penalty. This gives notice there will be a demand for TFRP payment. The individual has 60 days (75 days if addressed outside the U.S.) from the mailing date of Letter 1153 to protest the assessment and request an appeal.
You are entitled to professional representation throughout the entire TFRP process. Gary Kaplan is licensed to represent businesses and individuals in tax matters before the IRS. Call him immediately if you have concerns regarding payroll tax issues.
